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I have discussed the following partnership model with a person who could like to become partner with my in my company.

We discuss a range of scenarios that the business could run into. One of these could be that we have not generated any revenue for the last three months. We then describe that if the potential partner manages to get another customer, then this is worth 40% ownership in the company, because the company was obviously in big trouble. In similar ways we will all the time discuss his and my contribution and what his contribution is worth, using the scenarios as something to compare with.

Do you know of any examples where such a ownership sharing has existed.

It should be mentioned that I trust my potential partner very much, but my main concern is that I do not know how high he will prioritize the company, because I have earlier seen examples were he is unrealistic about the time he is able to invest in something.

Is this a way of creating a meritocracy where money is involved?

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4 Answers

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David - my perspective, doubtless others will have different and quite possibly wiser views.

For me, the key is in the word 'partner'.

Personally, I would prefer not to have all kinds of funky incentives in such a deal - they tend to promote behaviour that is not always in the best long-term interest of the partnership. From what you've said about your prospective partner, there may be challenges managing his expectations, so you don't want anything in place which might play to his impatience.

I would prefer to establish up front some sort of capital structure that you are both comfortable with and then get on building your business together. This should be based on the value you have already established and the value the other party could bring. If you can get to the point where you have a strong partner relationship, then you have much better chance of building a sound profitable business. On this point, time spent discussing your aspirations and expectations for the business up front and getting on same page before you go into business together would definitely be time well spent.

(On a practical level, you could consider a vesting structure, whereby your prospective partner has to stick around for say a year to get to keep his share, but I would leave it at that.)

Hope this helps.

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Agreeing with Steve, I think the conclusion is that you should not working with this person.

Specifically, quoting you:

I do not know how high he will prioritize the company, because I have earlier seen examples were he is unrealistic about the time he is able to invest in something.

For me this is an automatic fail. You require complete devotion.

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Maybe you should consider using vesting schedules. For instance, you could both have 4 year vesting with 1 year cliff. If you are not satisfied with his prioritization of the company, you can kick him out in the first year and no harm done.

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My worry is that his motivation will be lowered by this because he might risk working one year for free. Maybe one could do this on a per-month basis? – David Jun 25 '10 at 19:19
You can definitely set it up any way you want, especially if you set up a Delaware C-Corp which are really flexible. But, what I would recommend, is that you apply the same terms to both of you. If you set a one year cliff for him, do it for you too, and that will help disperse any doubts he might have because of the "We are both on the same boat here" phenomenon. – newyuppie Jun 30 '10 at 19:58
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This is a bad way to start a partnership. I would pass.

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